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The wage rate a firm has to pay and the output it can produce varies with the number of workers as follows (all figures are hourly):
\r\n| \r\n Number of workers \r\n | \r\n\r\n 1 \r\n | \r\n\r\n 2 \r\n | \r\n\r\n 3 \r\n | \r\n\r\n 4 \r\n | \r\n\r\n 5 \r\n | \r\n\r\n 6 \r\n | \r\n\r\n 7 \r\n | \r\n\r\n 8 \r\n | \r\n
| \r\n Wage rate (ACL) (£) \r\n | \r\n\r\n 3 \r\n | \r\n\r\n 4 \r\n | \r\n\r\n 5 \r\n | \r\n\r\n 6 \r\n | \r\n\r\n 7 \r\n | \r\n\r\n 8 \r\n | \r\n\r\n 9 \r\n | \r\n\r\n 10 \r\n | \r\n
| \r\n Total output (TPPL) \r\n | \r\n\r\n 10 \r\n | \r\n\r\n 22 \r\n | \r\n\r\n 32 \r\n | \r\n\r\n 40 \r\n | \r\n\r\n 46 \r\n | \r\n\r\n 50 \r\n | \r\n\r\n 52 \r\n | \r\n\r\n 52 \r\n | \r\n
Assume that output sells at £2 per unit.
\r\n(a) Copy the table and add additional rows for TCL, MCL, TRPL and MRPL. Put the figures for MCL and MRPL in the spaces between the columns
\r\n(b) How many workers will the firm employ in order to maximise profits?
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(c) What will be its hourly wage bill at this level of employment?
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(d) How much hourly revenue will it earn at this level of employment?
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(e) Assuming that the firm faces other (fixed) costs of £30 per hour, how much hourly profit will it make?
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(f) Assume that the workers now formed a union and that the firm agreed to pay the negotiated wage rate to all employees. What is the maximum to which the hourly wage rate could rise without causing the firm to try to reduce employment below that in (b) above? (See Figure 10.10.)
\r\n(g) What would be the firm’s hourly profit now?
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Are special offers likely to benefit consumers?
Do behavioural theories of the firm allow us to make any predictions about firms’ prices and output?
Why is it difficult to test the assumption that firms seek to maximise long-run profits?
What are the potential costs and benefits of mergers to (i) shareholders; (ii) managers; (iii) customers?
A firm under monopoly or oligopoly that aims to maximise sales revenue will tend to produce more than one that aims to maximise profits. Does this conclusion also apply under (a) perfect competition and (b) monopolistic competition, given that there is freedom of entry?
'A firm will always prefer to make more profit rather than less.’ Do you agree with this statement? Is it compatible with alternatives to the profit-maximising theory of the firm?
What is meant by the principal–agent problem? Give two examples of this problem that you have come across in your own experience.
Would it be possible for firms to calculate their maximum-profit output if they did not use marginal cost and marginal revenue concepts?
Assume that a firm faces a downward-sloping demand curve. Draw a diagram showing the firm’s AR, MR, AC and MC curves. (Draw them in such a way that the firm can make supernormal profits.) Mark the following on the diagram:
\r\n(a) The firm’s profit-maximising output and price.
\r\n(b) Its sales-revenue-maximising output and price.
\r\n(c) Its sales-maximising output and price (subject to earning at least normal profit).
For a firm to be able to implement a strategy of price discrimination it must be able to prevent re-sale amongst its customers. What factors would tend to make it more difficult for a consumer to resell a good?
Explain why the rise of e-commerce might increase the number of firms engaging in person-specific pricing.
Give two examples of price discrimination. What category of price discrimination are they? In what ways do the consumers gain or lose? What information would you need to be certain in your answer?
What three characteristics must a strategic move have if it is to be successful in altering the behaviour of a competitor later in the game.
What is meant by the ‘prisoners’ dilemma game’ when applied to the behaviour of oligopolists? What will determine the outcome of the game?
Why, under oligopoly, might a particular industry be collusive at one time and yet highly price competitive at another?
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In what ways is a monopolistically competitive firm likely to be less efficient than one under perfect competition?
Assume that a monopolistically competitive industry is in long-run equilibrium. On a diagram like Figure 8.1(b), show the effect of a fall in demand on a firm’s price and profit in (a) the short run and (b) the long run.
Assume there are just two firms (X and Y) and they are considering which of two alternative prices to charge. The decisions are made simultaneously: i.e. without either firm knowing the choice of its rival. The various profits are illustrated in the following pay-off matrix:
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(a) What is firm Y’s best response to each of the different prices firm X
\r\ncould charge? Does firm Y have a dominant strategy?
\r\n(b) What is firm X’s best response to each of the different prices firm Y could charge? Does firm X have a dominant strategy?
\r\n(c) What is/are the Nash equilibrium/equilbria? What is the most likely outcome of this game? Explain your answer.
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Think of three examples of monopolies (local or national) and consider how contestable their markets are.
On three diagrams like Figure 7.8, illustrate the effect on price, quantity and profit of each of the following: (a) a rise in demand; (b) a rise in fixed costs; (c) a rise in variable costs. In each case show only the AR, MR, AC, and MC curves.
Why is the profit-maximising price under monopoly greater than marginal cost? In what way can this be seen as inefficient?
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On a diagram similar to Figure 7.4, show the long-run equilibrium for both firm and industry under perfect competition. Now assume that the demand for the product falls. Show the short-run and long-run effects.
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